Turkish Economic Review www.kspjournals.org Volume 7 December 2020 Issue 4 Impact of Covid-19 on the South African economy: A CGE, Holt-Winter and SARIMA model’s analysis By Jean Luc EREROaa† & Mangalani Peter MAKANANISA b Abstract. The spread of the coronavirus disease (COVID-19) emanating from China touched South Africa like other countries across the world. This study analyses the impact of the COVID-19 pandemic on South African economy and total revenue. For this purpose, we have made use of a single country’s Computable General Equilibrium (CGE) model, Holt-Winter (HW) and SARIMA models by formulating one scenario based on the likely duration of the pandemic. In the scenario, we assume that the pandemic will last six months. The results indicate significant impacts on the macroeconomic variables, employment and sectoral level and on households’ well-being. First, at the macroeconomic level, the COVID-19 crisis resulted in a significant drop in the economic growth rate across all the macroeconomic variables. The Gross Domestic Product (GDP), exports and private consumption dropped by 7.10%, 13.19% and 7.10%, respectively. This represents a loss of real Gross Domestic Product of R338 billion. In contrast, the time series’ models project the state revenue to be around R1 104.5 trillion for Holt Winter model and R1 210 for SARIMA model, on average R1 157 trillion for the two models is expected. Furthermore, the models anticipate the loss in revenue at a region of R213.0 billion to a maximum of R318.2 billion from SARIMA and HW models, respectively for the same period. Moreover, the unemployment was expected to grow because of a sharp drop in sectoral productions. In addition, our findings reveal a contraction of sectoral exports. Finally, the rise of consumer prices and unemployment did greatly dampen the purchasing power of households. Keywords. Coronavirus, Covid-19, CGE model, Holt Winter model, South Africa. JEL. C68, C53. 1. Introduction he health crisis that started in December 2019 from the spreading of the coronavirus affected all the countries across the world. In fact, T COVID-19 has spread from China to developed and developing countries. Even though African countries being among the last ones to be touched, they encountered a communal danger to human life, social cohesion, and an economic catastrophe. These countries are portrayed by a very unproductive health system and by insubstantial organisations. Studies conducted by the World Bank (2020) and International Monetary Funds (2020) indicate that the spread of the coronavirus will utterly aa† South African Revenue Service, Operational Research, Pretoria, Pretoria, South Africa. +2712 422 6898 . [email protected] b South African Revenue Service, Operational Research, Pretoria, Pretoria, South Africa. +2782 4564669 . [email protected] Turkish Economic Review dampen African economies. Conferring to the Economic Commission for Africa (ECA), the continent’s economic growth rate could shrink deeply (ECA, 2020). Both the International Monetary Funds (2020) and the World Bank (2020)foresee an economic downturn extending from -2.1% and -5.1% mainly due to the negative impact of the pandemic on the world trade and its impact on African economies. As at 09 October 2020, South Africa recorded 683 242 cases of covid-19 consisting of 49 282 active cases, 616 857 recoveries and 17 103 fatalities. In its bi-annual Africa report, the World Bank (2020) indicated that Sub-Saharan Africa will register its first recession in 25 years with growth forecasted to contract by 3.3% in 2020 due to the COVID-19 pandemic. This is against the backdrop of poor economic performance of two of the region’s major economies. South Africa and Nigeria contracted by 17.1% and 6.1% respectively in the second quarter of 2020. Key institutions such as World Bank, IMF and South African Reserve Bank (SARB) have downwardly revised economic activities amid the corona virus pandemic and noted that lack of economic traction will last for much of the short to medium term. The African Tax Administration Forum (ATAF) estimated that Africa will lose about USD 3.99 billion in Customs revenue due to the COVID-19 pandemic by December 2020 (ATAF, 2020). South Africa’s economy is indestructibly affected by the spread of the coronavirus disease (COVID-19). This has impelled the government to speedily implement a number of measures, including the shutting down of the air, rail and land borders, the shutting down of schools and universities, firms and, the interdict on crowds of more than 50 people in March 2020. These regulations endeavouring at controlling the spread of the virus did definitely have significant impacts on all sectors of the economy and principally on economic development, employment, and households’ earnings. The purpose of this study is to assess the impacts of the COVID-19 on South Africa’s economy. For this purpose, we will use three models: the Computable General Equilibrium (CGE) model, Holt Winter (HW) model and SARIMA model. The first model is a simulation model, a single country’s CGE model which uses a database composed of a social accounting matrix representing the structure of South Africa’s economy. The most central advantage of this model consists of its proficiency to effectively denote sectoral and institutional linkages, as well as trade relations between South Africa and the rest of the world. The structure of this model is fundamental insofar as the impacts of the pandemic may not only impinge on the domestic economy but the world economy as well. The second and the third model is the lighter time series model known to predict the continuation of time series data which have both trend and seasonality with high precision (Pindyck & Rubinfeld, 1998). In this study, the main hypotheses is founded on both the time necessary to limit the pandemic followed by a recommencement of economic activities and the effect of the exports of the manufactured goods on the international trade. Taking into account uncertainty over the J. L. Erero & M.P. Makananisa, TER, 7(4), 2020, p.193-213. 194 194 Turkish Economic Review duration of the pandemic, one hypothesis has been put across with a pessimist scenario asserting that the pandemic prolongs over 6 months with a 50% decline in world demand for South Africa’s exports. We will also use the time series method through Holt Winter (HW) and SARIMA models to assess the impact of COVID-19 on the South African total revenue. These models are the lighter time series models and they are known to predict the continuation of time series data having both trend and seasonality with high precision. These types of models assumes that all explanatory variables are embedded in the past occurrence of the same univariate time series of interest, giving more weight to the recent data. It is for this reason the univariate time series forecast are considered unbiased (Shumway & Stoffer, 2006). The rest of the paper is presented as follows: Section 2 introduces the economic overview of the South Africa, Section 3 presents the literature review, Section 4 describes the methodology, Section 5 presents the findings and Section 5 provides the conclusion and recommendations. 2. Economic overview The first quarter of 2020 saw South Africa enter a third straight quarter of economic decline. But 2020 began a qualitative shift in the national and global economy. In the second half of 2019, the downturn was driven largely by the continued stagnation in commodity prices. From January to March 2020, however, the economy was increasingly weighed down by the impact of the COVID-19 pandemic. As a result, the South African economy is expected to shrink by around 7% in the coming year, while the global economy will fall by 5%, and by 6% if China is excluded (National Treasury, 2020). Moreover, the first quarter of 2020 marked the second deepest decline in GDP since 1994. While the contraction over the past nine months has not been as deep as the 2008/9 global financial crisis, the lockdown in April 2020 means the coming quarter will probably be the deepest downturn since the transition to democracy. The South African Reserve Bank has forecast a decline of 7% in the GDP for the year (SARB, 2020). In short, despite increasingly relaxed restrictions on economic activity, the economic recovery appears to have slowed down in the past three months. The main reason was the steep fall in domestic and global demand compared to pre-pandemic days. Most of all, South Africa’s major trading partners all face a significant economic decline. Data from the Organisation for Economic Co-operation and Development (OECD) indicate the extent of the global downturn. Besides, most major economies began to contract in the first quarter of 2020, as the Chinese economy plummeted 10%. Consequently, in the second quarter, except for China, all of South Africa’s main trading partners – the UK, Germany, the US and Japan – shrank by at least 8%. China, which brought the pandemic under control by March, saw its GDP rebound 12%. In the second quarter South Africa did better than J. L. Erero & M.P. Makananisa, TER, 7(4), 2020, p.193-213. 195 195 Turkish Economic Review India, the UK, Spain and Mexico, but slightly worse than Columbia, Hungary, Greece and Portugal (OECD, 2020). As expected, the GDP of South Africa dropped sharply, by 16% in seasonally adjusted terms, in the quarter ending in June 2020 as a result of the COVID-19 pandemic. The fall dwarfed both the 2008/9 crisis and the recession of the three preceding quarters Economic activity crashed in April, during the strict Level 5 of the lockdown.